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AGNC Pops as Earnings Better Than Feared

NEW YORK (TheStreet) -- American Capital Agency Corp. shares were up nearly 6% in early trading Tuesday after second-quarter earnings were not as bad as many investors appear to have anticipated.

The mortgage real estate investment trust (REIT) lost $936 million, or $2.37 a share, and reported a net book value of $25.51 a share. Though that was 11.8% lower than the previous quarter's net book value of $28.93 and lower than consensus expectations of $26.95, Sterne Agee analyst Henry Coffey argued in a note published Tuesday that "with the shares at roughly 86% of book value, we suspect most of this is already discounted."

AGNC borrows short term to buy longer-dated mortgage backed securities. When yields rise, as they have done in recent weeks, that harms their business because borrowing costs go up quickly, while the longer-dated MBS on their balance sheets decline in value

Shares were up 5.58% to $23.07 in early trading Tuesday. Shares of Annaly Capital Management, which has a similar business model and is set to report Aug. 7, were up 1.76% to $12.11.

"The second quarter was characterized by extreme volatility in both interest rates and mortgage spreads," said Gary Kain, President and Chief Investment Officer. "In response, we remained highly disciplined with respect to our risk management activities. We reduced the size of our asset portfolio, adjusted our asset composition to be more consistent with a higher rate environment, and materially increased the duration of our hedges. As a result of these actions and evolving market conditions, our exposure to higher rates is lower than it has been in years and our 'pay-up' risk is now minimal."